Reporting HSA Contributions on Your Tax Return

Follow these steps to report money that went into -- and came out of -- a health savings account.

Last year was my first with a high-deductible health plan combined with a health savings account at work. What do I need to report concerning the HSA when I file my taxes?

When you file, you’ll need to include Form 8889 to report all contributions and withdrawals associated with your HSA in 2013. The form has a line for reporting your direct contributions to your HSA, and you’ll carry that deduction to line 25 of your Form 1040. The form also has a line to report employer contributions, which you’ll fill in if you made pretax contributions via payroll deduction or if your company contributed to your account. This can be confusing, notes Roy Ramthun, founder of HSA Consulting Services, because the IRS considers both of these to be employer pay-ins. You’ll find the correct amount on your W-2 form (box 12, code W).

You should also have received a Form 1099-SA from your HSA administrator reporting withdrawals from the account. You need to report those distributions on Form 8889 and indicate which were for eligible medical expenses and which were not. Ineligible payouts are taxable, and you need to report them on line 21 of Form 1040. (HSA money withdrawn for nonmedical purposes is also subject to a 20% penalty if you’re younger than age 65; that penalty is calculated on Form 8889 and carried over to line 60 of Form 1040.) See the instructions for Form 8889 for details. Also see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

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Withdrawals for eligible medical expenses are tax-free at any age. Unlike with flexible spending accounts, however, your HSA administrator isn’t obligated to verify whether withdrawals are for eligible expenses. “All your HSA custodian knows is that it was a withdrawal, but you have to be able to show whether it was qualified or not,” says Jeff Munn, vice-president of benefit policy development for Fidelity Investments, which administers HSAs for many employers. So keep receipts for qualified medical expenses -- deductibles, co-payments and unreimbursed expenses such as dental visits and vision care -- in case you are audited (but don’t submit the receipts when you file your taxes).

An interesting quirk of HSAs is that you may withdraw the money for eligible medical expenses at any time -- there is no deadline for using the money. For example, some people choose to pay for their deductibles, co-pays and out-of-pocket medical costs from other savings so that they can keep more money growing in the HSA tax-free. But if you need to access some extra cash in an emergency, you can withdraw the money from the HSA at any time, as long as you have records showing that the expenses were incurred after the date you opened the account. “Once you open the account, for any qualified medical expense you have after that point, whether it’s five years or 30 years later, you can reimburse yourself from the HSA and do it tax-free,” says Munn. For tax purposes, you need to report the year you made the withdrawal.

For more information about health savings accounts, see Smart Strategies for Health Savings Accounts. Also see FAQs about Health Savings Accounts.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.